Forceful QE3 needed to aid economy - Fed official

QUINCY, Massachusetts (Reuters) - The Federal Reserve's new stimulus policy is essential to get the U.S. recovery back on track and to avoid damaging economic stagnation, a top Fed official said on Thursday.

Boston Fed President Eric Rosengren said he strongly supported the U.S. central bank's decision last week to launch a potentially massive program of asset purchases, arguing its risks are considerably smaller and more manageable than doing nothing.

He also said there was clear evidence that the move was working already, especially with wholesale mortgage rates, and that the market response across asset classes had been roughly what the Fed had expected.

"The actions taken by the Federal Reserve last week provide significant additional support to the economic recovery," Rosengren, a dovish Fed policymaker, said in prepared remarks to the South Shore Chamber of Commerce in Quincy, Massachusetts.

"They should result in stronger economic growth, and return us to full employment more quickly than would be the case absent the policies," he said.

In a question-and-answer session after his speech, Rosengren said the Boston Fed's position was that the natural unemployment rate should be at the lower end of a range of 5 percent to 6 percent. Other regional Fed banks are probably at the higher end of that range, he added.

"The unemployment rate is much higher than where we think it'll be in the long run," he said.

Though Rosengren does not have a vote this year on U.S. monetary policy, his endorsement of the Fed's third round of so-called quantitative easing, or QE3, amplifies Fed Chairman Ben Bernanke's argument that the Fed should do all it can to revive growth and get Americans back to work.

"It's not that we expect really bad outcomes, it's that we want stronger growth than what we've been seeing," Rosengren told a packed ballroom of local bankers and business leaders.

AVOIDING A RETREAT

The Fed last week launched an aggressive plan to pump $40 billion into the economy per month with no set end date. Instead, the Fed will buy mortgage-backed debt until the labor market outlook improves "substantially," and it promised to keep an accommodative stance for a considerable amount of time even after the recovery strengthens.

The Fed doesn't want to "make the mistake of retreating at the first, early signs of improvement" in the economy, Rosengren said.

The Fed in late 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades.

Yet the recovery, especially in jobs, has been slow and economic growth stumbled this year, leading the Fed to say it expects to keep rates at rock bottom at least through mid-2015. U.S. gross domestic product growth was 1.7 percent in the second quarter, not enough to put a dent in the unemployment rate, which was 8.1 percent last month.

Much like Rosengren's benchmark, full employment is generally seen when the jobless rate is between 5 percent and 6 percent, though some economists think it is higher after the financial crisis and Great Recession. Rosengren said it will take "several years" to get there.

Some Fed policymakers have criticized QE3 - which boosted U.S. stocks and depressed the dollar when it was announced - for having little chance of spurring job growth and for tempting inflation. But Rosengren said the risks of allowing the economy to stagnate outweigh the risks of ramping up asset purchases.

It was time for the Fed to announce "stimulus that will continue until the U.S. achieves both faster economic growth and lower unemployment, no matter the unanticipated interruptions," he said.

The stimulus, which included QE3 and the conditional mid-2015 rates pledge, should boost the housing market, broadly lower longer-term rates, and it "should provide market participants confidence that the Federal Reserve will do what it takes to improve economic outcomes," Rosengren added.

(Writing by Jonathan Spicer; Editing by Lisa Shumaker and and Kenneth Barry)

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